Canadians are increasingly indebted. 31% of us struggle to make our bills and payments. We're pretty clueless when it comes to retirement - just 40% have a good idea how money we need to save in order to maintain our standard of living in retirement.

This state of affairs worried the Harper government enough to prompt the creation of a Task Force on Financial Literacy. The numbers above are taken from their report.

I regard the the whole financial literacy exercise with some cynicism. As Canada has reasonably adequate government-funded income support programs for seniors, governments have a strong interest in ensuring that Canadians have enough savings that they do not need to rely upon those supports.

Framed in real terms, excessive debt and insufficient savings becomes either a problem of "too much stuff" or inadequate incomes: the value of goods and services coming into the household exceeds the value of that household's labour and capital.

The problem of inadequate incomes (rightly) receives much attention - governments devote billions of dollars to education, training, and other initiatives to promote success in the labour market.

But what about the problem of too much stuff? Nick Rowe has argued that people don't save now, but did in the past, because values have changed. I am not convinced that shifting values are the primary cause of diminished savings. There is not enough evidence about people's values, and too many alternative explanations, such as the greater availability of consumer credit.

Still, I agree that values matter. The Lord's Prayer - "lead us not into temptation" - was probably not written with the ipad 2 in mind, but is apt nonetheless.

Researchers told [six year old] children that they could have one thing they really wanted right away – a marshmallow, or a candy or a cookie, for example – but if they could wait while the researcher left the room and came back about 15 minutes later, they could have two.

It was designed to test self-control. The researchers, led by psychologist Walter Mischel, found only about 30 per cent of more than 600 children tested could hold out.

That's as far as it went until the early 1980s, when Mischel followed up and discovered the children who had been able to wait for two marshmallows were also doing better academically.

Jonah Lehrer, in a recent New Yorker magazine article, reports those children who waited 15 minutes averaged 210 points higher – more than 10 per cent – on college entrance exams than did those who could wait only 30 seconds.

The Task Force defines financial literacy as "having the knowledge, skills and confidence to make responsible financial decisions."

It all comes down to: Don't eat the marshmallow.

There is vigorous on-going debate about the origins of marshmallow resistance: the extent to which it is hard-wired, the extent to which it is developed by good child-rearing practices. The more interesting question is: can a six year old marshmallow eater ever learn to delay gratification, and thereby avoid getting saddled with too much stuff?

Walter Mischel, the creator of the original marshmallow experiments, has found that children can be taught better marshmallow-resistance skills - pretending the marshmallow is just a picture, for example.

Behavioural economics, too, is discovering ways in which people can be nudged towards doing the right thing. For example, automatically enrolling employees in employer-sponsored pension plans results in substantially higher long-term participation rates, as do simplified application procedures. Given a bewildering array of choices, people will take the easy route and do nothing.

The success of automatic saving plan enrolment suggests that the right behavioural nudges can get people to stop eating too many marshmallows. Yet automatic enrolment is something of a special case: governments and the financial services industry have a strong incentive to induce people to save.

Real world economies are characterized by monopolistic competition. As Nick Rowe explains, this means that firms will want to sell more at the existing price. Thus firms do everything in their power to persuade people to buy more marshmallows. "Don't pay 'til 2015" credit offers. Manipulative advertising campaigns. Enormous shopping carts - "How did my grocery bill end up being $300? My cart was still half empty." Brightly coloured candies placed at children's eye level.

We're surrounded by marshmallows, and then berated for our inability to resist eating them.

The solution is not obvious. Attempts to induce financially responsible behaviour can end up backfiring badly. For example, research suggests that the "minimum monthly payment" on credit card statements can reduce the amount people pay on their credit card bills - the minimum payment acts as an anchor, and pulls the average payment downwards. And there are restrictions that promote good behaviour, but at an unacceptable cost. For example, one US study found that, when Sunday shopping was permitted, white women's church attendance decreased, as did their average reported happiness. Banning Sunday shopping might help promote good behaviour, but would you be willing to have your freedom restricted?

The Bank of Montreal's website gives some idea what such a program might look like. The BMO's "savings lessons" explain: "As your kids watch you save for goals like a vacation or a new car, they will learn an important lesson about living within your means and delaying gratification."

The message: Don't eat the marshmallow. Yet. Save up for it first.

A better message might be: Don't eat the marshmallow. Period. Buy a used car and learn how to repair it yourself. Get on your bicycle and go for a self-propelled holiday.

If it was up to me, I would begin financial literacy lessons with home economics. Yes, pancake mix is heavily advertised, and carefully positioned at eye level in the supermarket, while flour, baking power, salt and sugar are invariably on the harder to reach top or bottom shelves. But "from scratch" pancakes take about 30 seconds longer than pancakes made from a mix, taste better, and cost far less. As Mark Bittman writes "Americans must have been sadly alienated from the kitchen for pancake mixes to ever have gained a foothold in the market, for these are ridiculously easy to make."

It's not enough to lecture people on the evils of financial irresponsibility. People need to know about alternative ways of achieving a good life - ways that require few marshmallows, or none at all.

Comments

You can follow this conversation by subscribing to the comment feed for this post.

"It's not enough to lecture people on the evils of financial irresponsibility. People need to know about alternative ways of achieving a good life - ways that require few marshmallows, or none at all."

Haven't you heard about our Great Stagnation? This minimalist living nonsense isn't going to boost economic activity.

Frances Woolley:It's not enough to lecture people on the evils of financial irresponsibility. People need to know about alternative ways of achieving a good life - ways that require few marshmallows, or none at all.

Here, however, one should make a distinction between two very different problems. The first are the ordinary irrational behaviors that can be fixed if individual people can just figure out better ways to do things. The second is when people are stuck in signaling arms races, and that is a deeper problem of collective action.

Cutting back on positional goods and other "irresponsible" expenses with strong signaling effects presents unpleasant trade-offs, although it would benefit everyone if they could all somehow coordinate to cut back on signaling by the same amount. This isn't just about status-signaling out of sheer vanity; by cutting back on the signaling expenses, you pretty quickly reach the point where your status among your social and professional peers is lowered in ways that may have real bad consequences.

Short of bringing back sumptuary laws, the only solution to this problem would be raising the status of thrifty behaviors, but I don't see any practical way to do that. (Actually, thanks to the recent cultural trends, nowadays there are ways to skillfully signal status at low cost, presenting your cheapskate ways as artsy, health-conscious, environmentally friendly, etc. However, this isn't that hard to do if you're a member of the intellectual classes, but it's more difficult for the average person.)

Assume people would buy in 6 days what they now buy in 7, that is the total quantity traded in retail would not change, (and if it does, so much the better.) Retail trade constitutes about 6% GDP. Assuming its expenses are proportional, shutting it down for one day would lead to an almost 1% increase in economic efficiency for a nation’s economy, thus in resources available for consumption.

For one thing, it would save a lot of energy. And since the same trade would be carried on in fewer hours, it would also suggest a higher hourly wage, and more leisure time, for retail workers, although fewer workers.

But, yes, those poor benighted souls of the first half of the twentieth century had no idea what glorious freedoms they were missing.

I do seem to remember things were more sociable in those days, with one day of the week when people had nothing much more to do than go to church and just hang around... correlation, or mere anecdote?

And of course, you had to be prepared to be self-sufficient for one day of the week. What a test of character that was! You had to have saved a marshmallow!

B - "Great Stagnation? This minimalist living nonsense..." I'm not sure if perhaps this is just a witty play on the name of Mark Bittman's column (the minimalist). Or are you saying that there is no problem of financial illiteracy, or of excessive debt/inadequate savings?

Vladimir - "The second is when people are stuck in signaling arms races, and that is a deeper problem of collective action."

That's a great point.

Greg - "Ban Sunday shopping! Sunday was a public good, destroyed by greed."

Restricted shopping hours make it harder for women to enter the labour force - there just aren't enough hours for people who work 9 to 5 to get their shopping done. Though given the shopping chores that I didn't get do yesterday, you might have a point about having to save a marshmallow...

Hi Frances - I think there is also an additional ingredient that is part of our overspending culture. It's actually the message of a significant part of left-wing productivist economics, which suggests that government debt and deficit spending is never that bad, that Say's law is upside down, demand creating its own supply, and so on. A lot of criticism from the left has taken the form: "don't think of the state as if it was a private consumer/firm", yet the converse is not conveyed so much: don't think of yourself as someone who can force a tax buck out of your grand-kid's pocket (or your neighbor's) to cover your ass. That may not be so popular obviously - another kind of marshmallow at stake here, wouldn't you think?

Isn't it weird that "Providentialism" is actually a word that is used seriously in some social science quarters, and which is supposed to describe an internally consistent and sustainable collective way to organize our economic life? I think we should question that too. Marketing is not just coming from firms attempting to sell us stuff, but also from "credible" people attempting to buy our political loyalties with a few rhetorical marshmallows.

The problem is that our consumer driven capitalist society has locked us into a Mobius band. In other words, we must consume our marshmallows now in order to earn enough money manufacturing marshmallows to enable us to buy marshmallows that we must consume now...

World Values Survey data for Canada would suggest that the idea of teaching children the value of thrift - a proxy for attitudes toward saving - has actually increased since the 1980s. That dovetails nicely with your rejection of cultural explanations for our transition towards being a nation of borrowers.

% of Canadians considering thrift to be an important value to teach to children:
1982: 14.3%
1990: 21.4%
2000: 27.1%
2006: 26.7%

Hosertohoosier - those are fascinating numbers. I'm wondering to what extent they reflect population aging - i.e. the older the population, the more you're going to get survey respondents saying "young folks these days..." Also, I wonder, if people figure that thrift needs to be taught, does that mean that they figure children/the population as a whole isn't thrifty enough - so that there's an increasing gap between what we figure is sensible and what we see around us.

Robert -why Mobius - i.e. why a one-sided three dimensional object?

Yvan - I've always been fascinated by this conflict within the left, which is particularly evident in western Canada, between the tree cutters (i.e. the productivists you describe who want growth and good union jobs) and the tree huggers (just let me sit in the forest with my iphone and tweet). In Canada the left is starting to split apart, with the tree huggers going green, so I don't know where that leaves the productivists.

I haven't heard providentialism used that much, but a number of feminist economists talk about provisioning.

I congratulate the Harper government for the creation of a Task Force on Financial Literacy. Over spending in Canad is obviously a big problem but much, much bigger in the US. In fact, it is such a big problem that economies all over the world are now on the verge of bankrupcy, Greece, Ireland and Portugal the most recent examples.
Just to clarify, the experiment done by Dr. Mischel was done with four year old children and two our of three ate the marshmallow.
When I learned about this experiment, I wasn't ready to act on it, but when I re discovered it in the early 2, 002, I found it to be the most important factor for succes in life and I needed to communicate it to as many people as possible. So, I wrote the book Don't Eat the Marshmallow Yet: The Secret to Sweet Success in work and in life which it has not been translated into 20 languages. It is interesting to note that it was a huge best seller in countries such as Korea (over 60 weeks as the number one best seller) China, Japan selling over 2 million copies and in the western countries including the US and Canada, it didn't surpass 100,000 copies.
So, we might be able to conclude that it is a "cultural" thing. In fact, the Koreans understood that principle so well that we had to publish a Marshmallow book for teen agers, a marshmallow book for children and even a comic book on the marshmallow principle. That is an example of a country that gets it and that is why it is now among the top 10 economies in the world and they are moving up. What will happen to us, in the western world if we don't change our consumerism craze, no one knows but I assure, it isn't pretty. So, bravo for Canada, even if it is only a modest step upon resolving a very dangerous economic behavior in its citizens.

Joachim: Not to nit-pick, but Ireland is not bankrupt because it was profilate. At least not in the way Greece was.

How do we square this with the macro policy implication - e.g. the paradox of thrift (if we all try to save more, we all end-up poorer), and the demographic reality that much of the Western world is getting older. I can foresee a world where the oldsters vote themselves ever increasing amounts of health care and income supplementation from taxes levied on a shrinking working population who find themselves facing an economy with ever shrinking demand (i.e. we're all Japanese now) as the same oldsters consume less and less until they eventually drop dead. Add global warming and scarce/expensive energy to the mix ... ugh. If only it was as simple as not eating the marshmallows!

If Leisureville is our future, then we are (well, anyone under 40 is in for a bleak future.

Frances - true enough, as I looked up providentialism in English, I got referred to a religious doctrine, and some reference to market providentialism (the usual simplistic interpretation of the invisible hand quip). But in french-speaking sociology departments, the word is used as a label for a "régime de régulation" that was linked with the "État-providence", and which is considered to have been the happier world that preceded the current darker days of "neoliberal" regulation (since the 70's oil crises). In a way, my point relates to both kinds of "Providence", from the market side and from the state side: as long as everyone's financial problems are always to be traced back to some dysfunctional institutional feature or other, is it so surprising that personal responsibility gets out of fashion?à

I regard the the whole financial literacy exercise with some cynicism. As Canada has reasonably adequate government-funded income support programs for seniors, governments have a strong interest in ensuring that Canadians have enough savings that they do not need to rely upon those supports.

Yes, very true. Canada's retirement system is conceived as a three-legged stool: Public programs, Employer-based programs and personal savings. This is the standard explanation in any literature on the topic and it is included in financial industry training.

Our government-based programs are exceptionally good. OAS is funded out of current tax revenues, CPP is a fully funded income-linked pension. That is, welfare for senior comes out of income taxes, CPP deductions go towards the accumulation of a fund for a national DB program. These programs are solvent and will continue to be so.

The second two legs themselves form their own linked system: Employer-based programs (Defined Benefit RPP's, Defined Contribution RPP's, Group RRSP's and now Pooled RPP's). The balance not covered by employer programs is left to RRSP's and now Pooled RPPs (Think Saskatchewan Pension Plan writ large). Through the calculation of the Pension Adjustment each dollar of income has an equal opportunity to be turned in to tax-assisted retirement savings.

Where I disagree with you, Frances, is in pinpointing the cause. There is both a subtle bias in this system and some deep flaws. First the bias. We think of pensions as savings, but define that savings in terms of a DB pension plan. This is a category error. A DB plan for an individual is a savings fund for the eventual purchase of a life annuity, the size of which is determined by the DB formula. And most plans pay out their own annuities.

This is the fundamental mission of employer-based leg. What you are asking each employer to do is to develop a side business as a life annuity company and call it a pension fund. The problems of operating a life annuity company, that is losses requiring extra contributions by the sponsor or continued underfunding, which one would expect from the annuity company model, have in fact been a large problem with DB pension plans. We have asked employers to do this but restrict their annuity activities to their employees, an undiversified portfolio of clients. No wonder some sponsors gave up.

Second, employer plans are voluntary. There is no compulsion to offer them. Companies can give them up. Why are we surprised when this in fact happened?

Third, especially in DB plans, employees view their pension plan and therefore their employer as some sort of "bank" or deposit company, holding their savings. When a company conducts this activity commercially we place significant regulations on their activities and the Canadian experience has been that size and scale really, really matter in banking and life insurance. Again why are we surprised when an undiversified insurance company in the guise of a pension plan has bad market experience and suffers catastrophic losses? The only difference is that we put a great deal of trust in the pension promise and attach a large amount of emotion to it.

All of these problems could be papered over with growing incomes, but I agree with your second point in that we have had a chronic case of insufficient incomes/income stagnation since 1980. This brought everything I said above right to the surface.

Behavioural economics, too, is discovering ways in which people can be nudged towards doing the right thing. For example, automatically enrolling employees in employer-sponsored pension plans results in substantially higher long-term participation rates, as do simplified application procedures. Given a bewildering array of choices, people will take the easy route and do nothing.

This in addition to above is why I have some hope for the new Pooled RPP's. It might rejuvenate the employer-based leg by removing the pension fund from the employer entirely. Something like the Saskatchewan Pension Plan for everyone.

But ultimately we come down to the same problem: incomes. House price increases have played a big part in the reduction of other disposable incomes, IMO combined with lacklustre job creation and exploitation of new markets. Indeed if we have too many goods floating around is it possible that we have too many imported goods?

Yvan, would "État-providence" be the French concept that matches most closely to "welfare state"? That's fascinating, because they have quite different resonances.

Patrick, "from taxes levied on a shrinking working population" - but I'm wondering if young people will just say no way. After all, there's lots of ultra-cheap marshmallows available from the older generation as long as you don't mind wearing dead men's shoes, so why not just relax and watch Turning Japanese on youtube? Measured GDP will be low, but people's well-being might not be as bad as the GDP measures suggest.

Joachim - have to say I'm not really sure how a lot of these financial literacy programs are going to stop people from wanting to just grab that marshmallow.

Determinant - "Indeed if we have too many goods floating around is it possible that we have too many imported goods?" IIRC there are these trade models that explain how, if one country has a high discount rate (i.e. is impatient) and the other country has a low discount rate (i.e. is patient) eventually the low discount rate country will end up owning the high discount rate country.

So, not so much that we have too many imported goods, but that we're buying them on credit because we want to just have those yummy and super-cheap imported marshmallows right away...

"Providence" aka "Divine Providence" is a theological term specific to Reformed or Calvinist theology. In the English speaking world it has a great deal of resonance because of the number of churches that accept Calvinist theology, in English Canada that consists of: The United Church, the Presbyterians, the Christian Reformed Church and the Baptists.

In Quebec and France the term hasn't nearly same the religious dimension since Calvinism was reduced to a trivial minority of people due to the policies of Cardinal Richelieu and Louis XIV.

Speaking of the word Provident, there is also the Central Provident Fund in Singapore. In the CPF, everyone working has to put away something like 20 percent of pay, which they can spend on either housing payments, or healthcare. Interesting how housing and healthcare are linked to Providence, while other goods aren't. I guess other goods are considered marshmellows :)

Determinant - my grandma spoke of the divine providence all the time, and she was Catholic from head to toe. Thus, I would tend to disagree that it had no religious resonance in Quebec. In France, I don't know. But, here I'd bet the expression "État-providence" quite probably helped transfer the role of divine providence to the State in the mind of many people, which could also help understand much resistance to change here (and plausibly in France - organized religion has no necessary link with providence, I think; if you believe in astrology, that's all it takes).

Frances - yes, the État-providence corresponds to the welfare state in the Francophonie, but it could indeed carry a whole different outlook with it.

"... automatic enrolment is something of a special case: governments and the financial services industry have a strong incentive to induce people to save" and "... this means that firms will want to sell more at the existing price."

These facts are not unconnected, which is why I'm guessing the "financial literacy" curriculum won't contain the following rules:

Frances: Isn't that the sort of thing one sees with men who are saddled with big alimony payments or people subject to extremely high tax rates? Even if it means a reduced income than otherwise, they'll 'drop out' and not bother (or work for cash or barter). And sure, I think people will just start to strip the corpse (to use a morbid metaphor).

While driving and flipping through the channels on the radio, I recently heard an appraisal show (a la Antiques Roadshow). The guy was saying that the price for fine china (e.g. Royal Doulton) has plummeted in part because the market is flooded by people selling Granny's china after she went to the home or the great hereafter. I imagine the same dynamic is possible in many other markets (houses in post war suburbs comes to mind). Yet another reason not to get sucked into buying a giant McMarshmallow houses in the suburban asteroid belts around our major cities.

Plenty of marshmallows lying around - just have to wait for the owner to discard them or drop dead.

Still, the big problem is with inadequate wages. Despite a fairly high cost of living in many places, pay in Canada is an absolute joke. Even with solid education it's really difficult to get into a position in this country where you can actually earn real money.
Changing attitudes might be nice but if people don't have the money how can they save?

They live in their parents' basement or with a bunch of roommates, and eat beans and rice. That's life for a middle-class person in their 20s in Vancouver.

Which suggests financial literacy is way less important than things like good family relationships - with a reasonably conflict-free, somewhat sane family, a person can live with their parents and save (no family is completely conflict-free or totally sane).

But if people have poor relationships with family and few social supports - possibly through no fault of their own - it's much much harder to save.

I meant to put this in the post, but I could distracted by marshmallows, and the instant gratification of blog post responses!

Patrick - some people have strong feelings about alimony so I won't comment here. Interesting about fine china, I should go shopping on ebay. Yes, your comment is slightly morbid, but I think you're right.

Phil Koop: "3. diversify"

Actually financial literacy programs do teach people to diversify - by buying mutual funds. Which may prove your point...

I have seen a fair bit of financial education books and other materials in my time. After seeing the insurance/investment industry close up, I can only conclude that much of it is sales material in disguise.

For example, take disability insurance. Many people may need this product or should consider it, that's why workplace policies exist with such frequency. But the individual market has a denial/modification of offer rate of 40%. For life insurance it's 10%. DI is a very, very complex product and most insurers take a very hard line on underwriting it. Nobody realizes that just because you want it or the book says you need it, that doesn't mean you can get it. Those books just take care of "motivating" and "convincing" a customer, industry jargon for a hard sales process.

The commissions for selling it are among the highest of any product you'll see. The financial industry is all about commissions.

The only really good financial advice I can offer aside from "keep your receipts, read your tax form and act accordingly (unless you have a business filing is easy for individuals who can use a computer) and pay yourself first. A bit of forbearance goes a long way, in my experience.

Add a financial product into the picture and the only advice I can offer is "it depends".

For example, a middle aged man wants to "invest". Can't stand mutual funds, had a bad go with some sales reps. He takes care of retirement planning with GIC's. Can't stand losses he can't replace. Otherwise he's OK and just wants to own something with some enterprise-level risk and get some dividends. If he can see and touch the business it helps. So he buys chartered bank stock. He enrols in the Dividend Reinvestment Plan with the bank he's used for decades. He only owns one stock.

In Canada I can't say that this man has been foolish. Even if you regard his bank investment as speculating, he has a stake well-diversified company with as near an economic rent as you can get in Canada. It's a slice of the Canadian economy, through the lens of banking. Mutual Funds can and do a lot worse while promising better, both in terms of security of principal, expected returns and costs of holding the position.

This is a really important point. The message of financial literacy campaigns is "don't eat the marshmallow yet, save, invest, and in time the marshmallow can be yours."

Financial literacy campaigns suggest that the reason people have inadequate savings is that they just don't have adequate coping/management skills.

But it could be that the reason people have inadequate savings is that their incomes are so low they can't possibly manage.

As I've written before (somewhere), for a person with kids with household income under $40,000 a year, there is no point in saving for retirement (unless there's a big change in Canada's retirement programs) because that person can expect a *higher* standard of living upon retirement with OAS, GIS etc than they enjoy right now.

Adam P "I think you need to qualify which people you're talking about there, if you really mean everyone then it's not really possible for that statement to be true in general equilibrium."

Fair enough. "It could be that people who have inadequate savings are in that position because their incomes are so low..." would be more accurate.

As you know (or I imagine you know, because you're a regular and thoughtful reader), I see the world in a very micro way, so the possible relationship between financial literacy campaigns and concerns about aggregate economy-wide savings hadn't even occurred to me.

I'm not committing myself as much about France, first because it's not my direct experience, and second because the distance between church and state seems to be almost a matter of identity over there. However, I do think there is a religious connotation in the concept of "État-providence", at least in Quebec, and again it requires no link to Calvinist background whatsoever - Quebec dominant catholicism right up to the Quiet Revolution has been drenched in Thomist philosophy where Divine Providence is indeed a prominent theme. If we're going to oppose protestant and catholic calls to Providence though, we may hypothesize, I suppose, that because the concept of community in the catholic ethos is quite at odds with the protestant idea of a direct link of the individual to God, it could have been relatively easier for a catholic population going through a rebellion about the moral authoritarianism of the church, like we did here in Quebec 50 years ago, to re-invest its belief in the Divine Providence in the direction of the State. The welfare state could be seen as Divine Providence democratized?

Frances, yes I think "It could be that people who have inadequate savings are in that position because their incomes are so low..." would likely be very accurate.

I didn't really mean to nit-pick with you, more I was using this as a context for making a point. Nontheless, such seemingly harmless instances of slightly careless language can cause a lot of confusion when discussing what such programs can or can't do.

If poor people don't save because they can't improving financial literacy can't help them much.

On the other hand, (for the US I'm thinking but probably applies to Canada as well), you often hear the low household savings rate being low to negative disparaged as a disaster heralding the decline of the society. Yet savings are 15% of natinal income!

Companies saving on behalf of their household owners is just as good for the economy as households saving to invest back in companies, maybe even better!

PS: and with respect to your previous excellent point about state pensions being sufficiently generous that anyone earning under, was it $40k(?), shouldn't save at all we can add that the government saving on behalf of the household is also just as good and possibly better.

"But it could be that the reason people have inadequate savings is that their incomes are so low they can't possibly manage."

I believe this is true more often in our society than we care to admit. The first culprit I would look at is housing. Others have mentioned that we have been on a 60-year housing boom fuelled by cheap credit policies and a bias towards owner-occupied housing funded by mortgages in both the US and Canada, with different implementations in each country.

Part of the downside of this has been a corresponding underinvestment in the rental market, particularly low-income housing, that is housing with suitable rents for low income occupants. The private market regards this segment as undesirable, due to low yield from the rents charged, low improvement value of the building compared a higher-rent building and the higher rent default rate of the tenants.

Given the opportunity private developers will build high-rent buildings for medium to high income tenants or condominiums.

The result is that average rents are high for low-income tenants. They have to compromise on other budget items like food and savings to make do. For families with the owner-occupied housing market is often the least-worst alternative, though many may prefer to rent given the alternative. Currently the market doesn't serve this segment very well.

Cheaper housing would allow the incomes to reach a "better" equilibrium. Food banks would become less necessary and savings rates would rise, two large budget items that are often sacrificed in cases of expensive housing.

The problem is that we view real estate both as a utility (shelter) and an investment. For many people it's their largest investment. However by increasing the returns from housing as an investment we decrease the utility value of our housing stock to service all levels of income.

Suppose we are in a constant economy in which people save when young and then dissave when old. Average savings is zero, but that does not mean that people are not saving enough.

Now suppose the population is getting younger -- then average savings go up, but again, no one is saving more or less. If the population gets older, then average savings decline, but still no one is saving too little.

Similarly, if the economy is getting more productive -- say due to technological change, then people will need to save less in order to smooth incomes. If the economy is getting less productive, then they will need to save more.

So when you are talking about NIPA savings, what you are really measuring is demographic shifts and productivity shifts. You are measuring the residual of what people do.

To properly track savings rates, you would need to dissagregate and define age + income cohorts. Then look to see if each person in a given age + income cohort is saving (or dissaving) more or less than they were in the past. Compare apples to apples.

I suspect that what you will find is the shift in age + income cohorts can fully account for any perceived change in national savings rates.

Let us think about a country in roughly external balance. Then given accounting (i.e. circular flow) identities the only way it can increase its income is to increase either its consumption or its investment.

So I don't quite understand what you want to say here. The problem is not total consumption - it is total indebtedness - it is not how much people are consuming in total - it is when in their life they are consuming things. Consuming things earlier - and going in to debt to do it - means that some of their future income is going to pay interest to other people (and these other people then get the chance to consume more). This is one narrative about the increase in inequality.

Of course all of this may be rational - maybe people really value consumption more earlier in their life. You still need to make the case that they don't.

As the father of girls just about to become teenagers, I can say that the positional goods pressure IS probably much greater earlier in life (when people after all are jockeying for position). Isn't this a very good argument for school uniforms (and perhaps also for uniform schools)? Actively dampening the steroid enhanced (literally) battle for social position during formative years is almost certainly a long term social good.

(In fact I've come around to the view that some sort of national service - not military - for 15-16 year olds might be a good idea. Taking some people out of disfunctional families, and other out of reality distorting privilege. Forcing the mixing of and discipline of people in formative years - and on the side providing much needed social services.)

reason - "As the father of girls just about to become teenagers, I can say that the positional goods pressure IS probably much greater earlier in life (when people after all are jockeying for position)."

- I wonder if that differs between men and women/boys and girls?
- how does earlier sexual development (as the father of pre-teens, I imagine you know all about that) change onset of positional goods pressure?
- from what I hear on the street, school uniforms mean kids use different positional goods - expensive diamond stud earrings, shoes, whatever is allowed within the boundaries defined by the school dress code.
- when social class is more clearly defined/fixed, does the strength of positional goods pressure change?

@Frances
"when social class is more clearly defined/fixed, does the strength of positional goods pressure change?"

I always found that a bit of a dilemma. I grew up in very egalitarian Australia (then at least), that had close ties to very class conscious England, but also cultural links to ultra competitive US. It always seemed to me, that the English were in a certain sense more at ease. "They knew their place" - meaning that they were comfortable with their identity. But America's "winner" culture, meant that large segments of their population became stamped as "losers". Australia traditionally solved the problem with the "tall poppy syndrome" - i.e. agressive suppression of any signs of pretension. I don't know if any approach could be called good. The English approach acted to suppress ambition, the American to create great friction. And the Australian led often to great hypocracy (see Dame Edna) and I think is breaking down now.